Reduction of Regulatory Burden on Small and Medium Enterprises: European Experience

The article is dedicated to the problems of the disproportionate regulatory burden on small and medium enterprises (SME) and the EU’s experience in supporting SMEs. Special attention is dedicated to the needs of micro enterprises in order to allow them pursue their business goals without unnecessary regulation. The paper provides concluding remarks as well as some suggestions for the future.

 What is small and medium-sized enterprise (SME)?

SMEs are defined in the Commercial code of Ukraine by the number of employees and turnover. A while ago, Ukrainian legislation concerning the definition of SMEs had been harmonized with the EU law and now includes three categories:

How crucial are small and medium-sized enterprises for Ukraine?

Small and medium-sized enterprises play a crucial role in the development of Ukraine’s economy, accounting for 99% of enterprises, of which 82% are micro businesses. For example, according to the official data the volume of products (goods, services) produced by SMEs constitutes approximately 58% of the total volume of products. Moreover, SMEs provide almost 68% of the total private sector employment in Ukraine.

The Ukraine’s growth strategy 2020 highlights the importance of improving the business environment by deregulation, but with particular emphasis on SMEs including micro enterprises. However, still a number of provisions are of declarative character and despite all the efforts made in order to improve business environment, the regulatory burden on SMEs is growing steadily. For example, only in 2014 executive authorities elaborated and submitted 2481 regulatory acts to the State Service of Ukraine for regulatory policy and entrepreneurship development. Due to their size and limited resources, SMEs can be affected by the costs of regulation proportionately more than their larger competitors. That is why it is important to implement the differentiated approach in regulatory policy according to the business size (differentiating between micro, small, medium and large enterprises). Micro enterprises merit a special consideration as they face the highest costs in complying with regulations.

How does the EU support Small business?

The EU puts SMEs at the centre of economic policy. In 2008 the EU enacted and in 2011 reviewed the Small Business Act which aims to simplify the regulatory policy for SMEs. The Small Business Act is based on the “Think first small” principle, which means that SMEs’ interests are taken into account at a very early stage of policy making. It is quite interesting and useful for Ukraine to appeal to the EU experience in reducing the regulatory burden on micro enterprises. In November 2011, the European Commission prepared a report “Minimizing regulatory burden for SMEs, ‘Adapting EU regulation to the needs of micro enterprises” which emphsized commitments “to ensure proportionality in the EU approach to regulation, in particular with regard to micro enterprises”. For example, the Commission’s elaboration of all legislative proposals is based on the premise that micro enterprises “should a priori be excluded from the scope of the proposed legislation unless the necessity of their being covered can be demonstrated”. Even if micro enterprises are covered by the proposed legislation in order to comply with public policy obligations, lighter regimes and different mitigating measures should be applied and adopted for them. This is often related to simplified reporting obligations, partial or full exemption from some regulations, tax exemptions and so on.

Although there are a number of scientific works on small business support in Ukraine, especially micro enterprises ([1], [2], [3]), there is still a burning need to look for more effective and progressive ways on how to stimulate SME’s business activity, namely to reduce regulatory burden on SMEs. In this context, it is relevant to refer to the experience of European countries, which use innovative tools to solve the “high regulatory burden” problem. For example, in order to establish a period of increased regulatory stability for the smallest businesses the United Kingdom Government introduced a three-year moratorium on new national regulation for micro enterprises and start-ups from 1 April 2011. Moreover, they did not stop on that measures and decided to go further. Firstly, it resulted in an interesting rule “One-in, One-out” aimed to offset any increases in the cost of regulation by finding deregulatory measures of at least equivalent value. Secondly, in order to increase pressure on Departments to deregulate the “One-in, Two-out” rule was introduced. According to this rule Departments are expected to offset any increase in the cost of regulation by finding deregulatory measures of at least twice the value [4]. Since the start of 2011, under “One-in, One-out” and “One-in, two-out”, the government has reduced the annual net cost to business of domestic regulation by £2.189 billion. Between the start of 2011 and July 2015, the government  was supposed to introduce:

• 119 regulatory ‘ins’
• 213 deregulatory ‘outs’
• 184 measures with zero net cost to business [5].

Additionally, almost all of the EU member states adopted the SME Test with specific provisions on micro enterprises which implies assessment of the impact of forthcoming legislation and initiatives on SMEs at a very early stages of drafting. It includes different important steps: 1) obligatory consultation with SMEs representatives; 2) measurement of the regulatory act impact on SMEs (costs and benefits); 3) assessment of alternative mechanisms and mitigating measures. According to the survey carried out among the EU member states, most of them perceived the SME Test to have had a policy impact and real added value for SMEs, especially for micro enterprises [61].

         Moreover, some European countries, such as the United Kingdom and the Netherlands, in order to streamline the flow of new legal acts and give certainty to business, use common commencement dates (CCDs), which means that new domestic regulation and decisions affecting business is brought into force on one of the two specific dates in a year. The main aim of using CCDs is to limit the dates on which business have to implement regulation leaving them free to focus on running their businesses. For example, the dates chosen in the United Kingdom are 6 April and 1 October. As a rule, these dates are preceded by the publication of guidance material at least 12 weeks in advance, allowing SMEs to better prepare and understand legislative changes, enabling them to plan ahead. Indeed, in some circumstances legislator may enact the acts on other dates. Such circumstances include measures which remove significant risk or detriment from business, measures concerning public, animal health, environmental issues and so on [7]. According to 2014 Business Perception Survey carried out by the UK Government, businesses are feeling the impact of the aforementioned actions. The proportion of businesses, which see the regulation as an obstacle to their success, has dropped by 11 % since 2009. Fewer businesses find the amount of time spent complying with regulation to be burdensome, falling sharply [8].

What should be done in Ukraine?

Ukrainian SMEs identify compliance with the regulation as a key challenge. SMEs, especially micro enterprises, agree that the level of regulation in Ukraine is an obstacle to business success. The Law of Ukraine “On bases of the state regulatory policy in the sphere of economic activity” does not consider SMEs’ special needs. According to Ukraine’s obligations in the context of the EU-Ukraine Association Agreement, which emphasizes cooperation in the development of SMEs and the burning need to provide business-friendly environment for micro enterprises in our country, we need to adopt a differentiated approach in regulatory policy according to the business size. Rules that have potential impact on business should be created from the SMEs’ point of view. In order to minimize regulatory burden for SMEs it is reasonable to implement SME Test, which implies rigorous assessment of the impact of forthcoming legislation on SMEs. Additionally, specific provisions on micro enterprises should be elaborated with the possibilities to exempt such enterprises from the scope of forthcoming regulatory acts. Unless micro enterprises are not excluded from the effect of the regulatory acts, different mitigating measures should be adopted for them.

Furthermore, according to some surveys [9] the serious obstacles for business success in Ukraine are never-ending changes of legislation, absence of legal regulation stability as well as significant amount of laws and drafts (‘regulatory inflation’ [10]) which requires additional time, human and financial resources for their processing and compliance. In this context common commencement dates could be an innovative solution to help improve the life of small business in Ukraine, especially micro enterprises. It can help SMEs to implement new measures more effectively and to plan for new regulations which is leading to reduce costs. That is why it will be relevant to introduce common commencement dates in Ukraine as a part of an experiment for a fixed period (1-3 years) in some areas of economic activity in order to decide on the effectiveness of this innovative mechanism. In the context of bringing the national legislation in line with the EU law the number of such dates may be more than two. The area in which it is recommended to implement common commencement dates is environmental protection. Indeed, in order to comply with the EU requirements a significant reform of national legislation on environmental protection is needed. According to the experience of European countries, EU standards on environmental protection are the most expensive and difficult to implement into a national law. In its turn it will require considerable efforts and resources from the SME’s. Common commencement dates will stimulate the legislator to reduce the overall volume of regulation as the burden becomes more apparent.

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